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April good for stocks this year

| Sunday, April 23, 2006

With only five trading days left in April and considering last week's market move, it will not be long before you hear the cliche, "Sell in May and go away."

Many traders take for granted that there is a seasonality factor in stock groups and the market overall.

Thus comes the aforementioned cliche, which stems from belief that the market typically has a relatively fallow period from the end of May through early fall before seasonal factors give stocks a solid year-end boost.

But like many things we take for granted, a closer look sometimes presents a different picture.

At times, seasonal norms appear to be functioning precisely as expected. April has been a good example.

During the past 56 years, April has had the fourth-best average monthly gain. The market's struggles early this month made it appear that this year would be an exception.

Digging a little deeper, however, shows that in good or bad Aprils, the most productive portion of the month comes after the tax return deadline.

So far, April 2006 is working exactly as the seasonal pattern suggests it should.

But often what appears to be compliance with seasonal norms is nothing more than mere coincidence. Had it not been for the sudden change of heart about interest rates, stocks this year might not have had a post-tax-day rally.

With May approaching and many minds more focused on vacation schedules than market movement, it might be worth considering that the belief that the summer season is not great for stocks has a few cracks in it.

If you do sell in May, you better not go too far away. If you do, you will miss July, which on average is the sixth-best month of the year, with results for the S&P 500 only a small fraction below the perennially up month of October.

Using time in June to prepare for July becomes even more compelling when you consider that when July is an up month, its average gain is the third best of the entire year.

This year, however, the summer season has some added significance since 2006 is a mid-term election year.

In these years, July clearly is the best month in the May-through-September stretch. It is interesting to note that in presidential election years, the summer months have a far better record of producing gains than in the mid-term election years.

Looking at percentage gains or losses in any given month, however, can be misleading. A more appropriate approach might be to look at the odds that a month will produce a gain.

In this perspective, only September offers a better chance of producing a loss than a gain. There is better than a 50-50 chance of seeing gains in every other month of the year. The best odds are in December, which during the past 56 years has been an up month 75 percent of the time. November is the next best with a 67.86 percent record.

The S&P 500 has produced a gain in May a third more times than not. June has been an up month 11 percent more often than a down month. July has been up 15 percent more times than down, and August has been up 24 percent more times than not.

And, of course, there are the anomalies such as July in 1974 when the S&P 500 fell 7.78 percent followed by a 9.03 percent drop in August thanks to rapidly rising energy prices -- an unfortunately eerie similarity with current conditions.

And then there was the 7.9 percent July drop four years ago that was preceded by a 7.25 percent drop in June as the Internet bubble burst. August of 1988 produced the second worst one-month market drop when the S&P 500 slid 14.59 percent on an international fiscal crisis. This was second to the 21.76 percent drop in the infamous October 1987 dive.

But while it is interesting to play with the market's historic stats, save for the last two months of the year and September, there is not enough statistical evidence to justify making decisions based on the supposed seasonal factors.

Nonetheless, history suggests you might want to spend some of your vacation time this summer watching stocks, not waves hitting the beach.

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